Hanging Man

• In a uptrend a red or blue day occurs with a body in the upper part of the sessions range, a long lower wick, and little to no upper wick

• Analysts do not care of the small candle is red or blue

The Hanging Man formation indicates trend exhaustion, and suggests a bearish reversal. After a bullish rally the day opens with a significant sell-off, creating a long bottom wick. However, buyers are able to push prices back to the upper range, creating a short body.

The meaning of the candle is a bit ambiguous. Even though sellers brought the market to low lows, in the end buyers brought the close price back up near the market open price. Overall this candlestick serves as an early indication that buyers are losing control and bearish traders are gaining strength.

Since the signal alone is fairly weak, traders look for a number of characteristics to reinforce the bearish signal.

In ideal conditions traders want the wick length to be several times longer than the body of the candle. The longer the candle, the stronger sellers were able to drive price down and the stronger the bearish signal this candle provides.

Although above we state that most analysts do not care if the small candle is red or blue, traders will actually take a red candle to suggest a slightly stronger bearish signal. Sellers being unable to bring the close price below the open price suggest stronger bearish control.

The bearish Dragonfly Doji serves as a stronger sell signal than the Hanging Man pattern. Since a Dragonfly candle (where open and close are identical, but we see a low similar in length to the Hanging Man) reflects more uncertainly and lack of direction, candlestick analysts will usually take it as a stronger bear signal.

• Hammer vs Hanging Man.

Alone, Hammer and Hanging Man candles look identical. Their difference lies in what type of trend the candle follows. If the market had been trending up for a while the formation is a Hanging Man. In fact the name, Hanging Man, suggest price is hanging over a precipice, ready for a fall. Hammers follow a bearish trending market and its name suggests price has already been weighted down.

Although traders will usually wait for confirmation the next day, look for selling opportunities to come.